As a business owner with a set of “books”, you’ve probably come across this thing called the “Chart of accounts”. What is this, and why is it so critical to consider?
So here’s the skinny: the chart of accounts is the literal backbone of your business bookkeeping. (Psst, your books are the backbone of your business. Period.) In other words, it’s the index, codex, listing of all the categories of the financial transactions in your business.
Why is this so important? The COA is how the financial reports are built. These are the reports that your accountant uses to file your taxes. Yeah, important.
Now, certain platforms, like Quickbooks, will auto-generate a COA for you. Some only supply the bare minimum, some provide a full range of the “expected” categories based on the setup questions asked when you register. It is recommended that you build your own, either by tweaking what is generated or by building your own.
Here are some point to bear in mind while building your very own COA:
- K.I.S.S (keep it simple, silly): simple works. Don’t over complicate it by having everything in its own account. That is SO not the point here. The purpose is to illustrate how your finances line up. Your assets vs. your liabilities. Your expenses vs. your COGS. Tax deductions are a good thing to break out under your expenses, hence the “recommended” categories by Quickbooks (hint, hint). However, the IRS will never care that you spend $200 on staplers and $1,500 on paper. “Office Supplies” is specific enough here.
- Stifle Creativity: take pity on your poor bookkeeper (and accountant) and avoid using flowery or misleading names on accounts. Calling your Owner’s Compensation “Owner’s Pay” is one thing. Calling it “Lining God’s Pocket” is not a good idea. This is not the time to get quippy or cute.
- Stick To It: Generally, most businesses plan to be in business for a number of years. Perhaps decades; do we dare to dream and say centuries? Sure, why not. As things change over the years, you will have changes that will become necessary (I doubt Ford had an account for Cable & Internet when they first started. Things like tax laws, new technology and business growth will cause some edits to your COA. However, in general, leave it alone! Don’t get in there every month and change everything around. This is the one time in your bookkeeping when we advise you to “set it and forget it”.